Annuities in 401(k)s? Savers show interest, but advisors are hesitant

A vast majority of workers say that employers have a responsibility to help them achieve guaranteed income in retirement, and many think annuities are the way to do it, according to a new survey from Nuveen and the TIAA Institute.

The survey, which asked 2,100 401(k) participants about their views on lifetime income options, found that 93% of respondents believe workplace plans should offer participants the option to convert a portion of their savings into guaranteed lifetime fixed monthly income.

A majority of workers are open to fixed income annuities as a means to achieve that. Just over 50% of workers said that it would be "somewhat valuable" to include fixed annuities in 401(k) plans, while 41% said it would be "very valuable."

Over recent years, an increasing number of plan providers have begun to include annuities and other retirement income solutions in their 401(k) offerings, according to research from Schroders, a British asset management company. In 2024, 38% of plan participants had access to some form of retirement income solution, up from 31% in 2023.

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The expansion of annuity offerings in 401(k) plans gained momentum with changes introduced by the Secure Act in 2019. The law created a fiduciary safe harbor for plan providers around lifetime income investments, lowering the barrier to offering vehicles like annuities to plan participants, according to Michael Kreps, principal at Groom Law Group in Washington, D.C.

One tool in a big bag

The rising tide of 401(k) annuities is promising for workers eager to invest in lifetime income options, but financial advisors say the controversial vehicle isn't for everyone.

Compared to more sophisticated investment and withdrawal strategies that many financial planners employ, advisors say that workers are often drawn to annuities because of their relative simplicity.

"The simplest thing to do is to turn over some or all of their account to an annuity company, and the annuity tells them how much they will get for the rest of their life," said Daniel Lash, partner and financial advisor at VLP Financial Advisors in Vienna, Virginia. "With the annuity payment, the employee can then determine what priorities to spend on. While this may be the simpler solution, it may not be the right fit for all retirees."

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High fees, complicated payout options and potential weaknesses in the issuing insurance company make many annuities less than ideal, but newer offerings from asset managers like BlackRock could be worth considering for workers who want to generate consistent income in retirement, according to Cristina Guglielmetti, founder of Future Perfect Planning in Brooklyn, New York.

BlackRock's LifePath Paycheck, a target-date fund that launched last April, has quickly become one of the largest lifetime income target-date strategies in the defined contribution market, the company reported earlier this year.

The plan functions as a target-date fund until participants turn 55, at which point roughly 10% of their balance begins shifting to lifetime income investment "units," reaching about 30% by age 65 if not converted to an annuity. Starting at age 59½, participants have the option to purchase an annuity, creating a guaranteed retirement paycheck, with this window remaining open until age 71. The plan does not involve additional fees when participants purchase annuity contracts.

Such funds could offer an effective solution for workers seeking a relatively simple retirement strategy, but advisors say relying on any one vehicle is less than optimal.

"The key is ensuring the annuity complements the broader retirement strategy — not replaces it — and allows for rebalancing and tactical moves when markets dip, knowing your income foundation is secure," said Nathan Sebesta, owner of Access Wealth Strategies in Artesia, New Mexico.

Working with the plan you have

Access to fixed annuities directly within 401(k) plans could simplify the process for workers seeking lifetime income options. However, advisors point out that plenty of alternatives exist for those whose plans lack these offerings.

"Stable value funds and bond funds can provide income and low volatility, if not a fully predictable stream of income," Guglielmetti said. "Also, when an employee retires, they have a lot more options and aren't required to keep their money in the 401(k); a rollover to an IRA (where we can construct a Treasury or TIPS ladder) or a SPIA [single premium immediate annuity] at that point may make a lot more sense than making do with the 401(k) offerings."

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"Often, I have clients gradually shift to a more conservative asset mix as they approach retirement, in preparation for an eventual rollover/distributions/partial switch to a SPIA," she added.

Advisors say that workers are likely drawn to annuities because of the stability they offer. But, in practice, many workers are agnostic about the exact investment vehicles used to achieve their goals, so long as they can create guaranteed income for themselves in retirement.

In certain instances, annuities can run opposite to a worker's other priorities in retirement. In the TIAA Institute's survey, 68% of respondents said that the ability to cover unexpected expenses in retirement was a high priority for them, outranking other considerations like maintaining a standard of living throughout retirement and not outliving retirement savings.

Yusuf Abugideiri, chief investment officer at financial planning firm Yeske Buie in Vienna, Virginia, said annuities lack flexibility compared to other investment options, limiting a retiree's ability to handle unexpected expenses.

"An annuity doesn't allow you to change your spending plan or access money in large chunks if/when needed, and that can pose a significant problem for clients as they progress through retirement," he said.